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Levfin insights drivers#

Respondents to the LCD Leveraged Finance Survey expect high-yield bonds to outperform leveraged loans, and while it is anticipated that the loan index has not yet hit cycle lows, the loan default rate will continue to remain below historical averages. The new year brings lots of speculation about what’s to come in the debt markets (see below for Goodwin’s predictions).Meanwhile, traditional money-center banks are taking a hit to their profits due to their pullback from underwriting deals in the leveraged finance space, which historically has generated lucrative fees, and are bracing for additional loan losses. Regulators are taking notice – the European Central Bank has raised Deutsche Bank’s capital requirements due to the risk of leveraged loans on its books. Relatedly, Bloomberg estimates that banks are still holding around $40 billion of hung debt on their balance sheets. As we highlighted in our December Debt Download, Wall Street banks had a tough 2022 as the credit markets dried up, forcing them to hold large portions of would-be syndicated debt on their books and in some cases, to ultimately sell it at huge discounts.December also saw average all-in clearing spreads for single-B new issuances widen slightly to S+593 (from S+582 in November, a seven-month low).

In the syndicated loan market, pricing flex favored borrowers 14 cuts to no increases in December and, although covenant flex was limited, terms were generally tighter in the deals that cleared.

PitchBook/LCD’s Quarterly Review notes that, due to an uptick in refinancing activity, 4Q22 saw an overall increase in leveraged loan issuance, though the volume of loans backing M&A deals was at its lowest level since 2010 and PE-backed issuance was at its lowest level since 2009.

Despite the market downturn, it’s still worth noting that while M&A volume in 2022 paled in comparison to 2021 – a year that some view as a high-water mark – it was still in line with pre-2021 volume and amend-and-extend volume hit new highs in 2022 as borrowers sought to push out loans maturing in 20.

Levfin insights drivers#

Debtwire’s LevFin Highlights for FY22 provides a breakdown of the drivers behind the year-over-year plummeting volume in the U.S. In sum, the year started off with strong volume and borrower-friendly loan agreement provisions, but took a quick turn given macro-economic and geopolitical headwinds and ended with an increased number of liability management transactions, a general decline of aggressive credit agreement baskets and flexibility for borrowers, and continued fights between borrowers and lenders over credit spread adjustments (CSAs) in LIBOR to SOFR transition amendments (more on that below).

Loans 2022 Wrap-Up, aptly named “A Tale of Two Markets”, provides a great recap of trends in the leveraged loan market. bond market and a punishing year for equities.

2022 was a volatile year for various markets, including historic losses in the U.S.